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Await firm volume growth before turning positive…

About the stock: Eicher Motors (EML) is the market leader in the >250 cc premium motorcycle segment (FY21 market share at 93.5%) through its aspirational models under the Royal Enfield (RE) brand, such as Bullet, Classic, Interceptor among others.

* Via its JV with Volvo i.e., VECV (EML has 54.4% stake), the company also has a presence in the CV space (6.4% FY21 market share)

* Strong net cash positive b/s with healthy return ratios metrics

Q3FY22 Results: Eicher reported a muted operational performance in Q3FY22.

* Consolidated revenues were at | 2,881 crore, up 28.1% QoQ

* Reported EBITDA margins came in at 20.2%, down 67 bps QoQ

* Consequent consolidated PAT was at | 456 crore, up 22.2% QoQ

What should investors do? EML’s stock price has grown at ~1% CAGR from ~| 2,500 levels in February 2017, underperforming the Nifty Auto index

* We retain HOLD amid lack of volume growth visibility in core RE portfolio

Target Price and Valuation: We value EML at | 2,790 on SOTP basis; assigning 28x PE to RE business & 25x PE to VECV business on average of FY23-24E numbers.

Key triggers for future price performance:

* We expect 11% (FY21-24E) RE volume CAGR aided by low base, abating of supply constraints, new products introduction (strong launch pipeline over next 12-18 months), network expansion benefits and higher exports

* Continued VECV outperformance in CVs to lead to market share gains; we build 27% (FY21-24E) volume CAGR as cyclical recovery gathers pace

* Overall FY21-24E consolidated net sales CAGR expected at 19.6%, with margins seen rising to 23.8% by FY24E riding on operating leverage gains

* Healthy return ratios profile with RoCE seen at ~18% levels by FY24E

Alternate Stock Idea: In our auto OEM coverage, we like M&M.

* Focused on prudent capital allocation, UV differentiation & EV proactiveness

* BUY with a target price of | 1,125

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